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Sourcing Trends 2015: The State We’re In

Costs. Compliance. Cotton price fluctuations. Sourcing executives are facing it all—along with dozens of other factors affecting how goods get made.

At Sourcing Journal’s 2014 Summit, “Insight and Outlook,” an expert panel including Bill McRaith, chief supply chain officer of PVH, Bryan Riviere, Levi’s VP of global supply chain product development and sourcing, Stuart M. Goldblatt, president and COO of Bill Blass and Mark Messura, Cotton Inc. SVP of global supply chain marketing, discussed the state of sourcing today and how their respective companies are dealing with the challenges of the market.

With cotton’s price decline at the forefront of many manufacturers’ minds, Sourcing Journal founder and publisher Edward Hertzman, who moderated the panel, opened the discussion posing a question about how the lower cotton prices are in fact affecting the market, if at all.

Higher than-expected worldwide supply forecasts, declining demand for cotton apparel, and news from China that it would begin releasing large portions of the more than half of the world’s cotton reserves it is sitting on, have driven cotton prices down to their lowest levels since 2009. In the five weeks ending October 3, the seven-market U.S. average cotton spot price dropped 6.4% to $0.6259 per pound.

But some don’t seem to think the lower prices will do anything to alleviate sourcing costs, as increases in labor and compliance costs are diminishing the benefit.

Hertzman asked Messura about his expectations for cotton pricing and how the lower rate is affecting FOB costs.

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Messura said world prices are down roughly 21 percent this calendar year, but the industry is just in one of its cycles of cotton prices. “With the big world supply in cotton right now, big stocks in china, healthy production expected this fall, we’re going to continue to see softness in the cotton prices in the market,” he said. He added that Cotton Inc. has seen yarn prices starting to tick down in cotton as well as polyester and to expect softness in both raw material costs.

Cotton farmers are looking at what to allocate land to, just as retailers look at what to allocate floor space to, and the prices of corn and soybeans will be key in determining what farmers will plant. “Long term, the price of those commodities, corn and soybean in particular, will influence the price of cotton,” Messura said. “And as the price of cotton goes, so goes the price of polyester.”

McRaith said with all things considered, including rising labor costs around the world and namely in China where labor costs have gone up between 10 and 15 percent per year, when you start to factor in companies working toward increasing efficiency and lean manufacturing, for example, people should start to see better prices.

“The reality is the future is far better than it’s been for some time, and certainly over the next two to three years, assuming you’re in the same place doing business in exactly the same way that you were, my gut tells me that you should expect to see flat to down general prices,” McRaith said.

In terms of efficiency, Riviere said the industry needs to learn how to get out of its own way. Levi’s went through a restructuring six months ago, and through that experience, Riviere said, the company was able to see all of its inefficiencies and where it was making things more difficult for suppliers, for example.

“The ability we have to make change and be different,” Riviere said, “I think that ability in costing and doing things more efficiently, taking complexity out of the supply chain is where we’re going to get the biggest bang.”

With costs rising, at least for now, and consumers steadily looking for ever-present promotions, Hertzman asked whether retailers will be willing to pay more to cover the costs.

From a raw materials standpoint, today’s per pound prices for cotton are at the same price level as in 1978, Messura said, and the only way farmers are able to sustain themselves is through efficiency and technology improvements. “The question becomes then, do we see a future landscape that still has room for these types of efficiency and technology improvements, and the answer is yes,” he said.

Riviere agreed, adding that neither his retailers nor consumers will pay more for product. However, he said, “Within the spectrum of the supply chain, there is so much opportunity, we just need to attack it, rip it out and we can deliver better margins.”

Made in USA has also been an industry buzz-phrase in the last year, and Hertzman, who has in the past described U.S. manufacturing as more hype than reality, said based on the economics of making here and the vast wage discrepancies between the U.S. and low-wage nations like Bangladesh, for example, most brands will never be able to make in America.

“I believe in a certain proportion of made in USA, but its not to migrate sourcing from China to the USA,” Riviere said. He mentioned the Levi’s higher end, higher cost collection, which it makes in the USA and said he does think there is a place for it.

“Having that ‘Made in USA’ label in the back of your jacket or on your denim has some equity,” Riviere said, “So I believe strongly that there needs to be a presence—its not going to be a wholesale shift, but it will be very pointed pinnacle product or collections that can have a Made in USA label.”

The talk naturally turned to compliance, and to whether there is a benefit to the responsible behavior. When you break down an FOB cost, compliance isn’t accounted for as labor or raw materials, Hertzman said, asking the panelists how they account for the cost of compliance and whether factories ever see the benefit of being compliant.

McRaith, who has spent more than half of his career in manufacturing, said, “I just fundamentally do not believe that compliance is expensive or is costly.” PVH’s global supply chain mission statement says that it will only work with socially compliant partners and the reason isn’t just because the company is nice, McRaith said. “We believe that socially compliant partners have lean manufacturing capabilities, they have put in the most efficient supply chains, they think of all aspects of limiting waste, and therefore in reality create the lowest cost goods at the best and most efficient prices that we can get.”

Probing further, Hertzman noted that in the Summit’s earlier “Retail Today” panel, when speaking on the rise of fast fashion, Faye Landes said the customer doesn’t really care that they can only wash a garment three times before they have to junk it. And some brands are just working to source a $5.50 jean to sell to discounters, so cost is critical and compliance can at times be secondary.

“Are people willing to pay a premium for this [compliance] and will this translate into the mass markets, or will many people continue to just run around and keep their eyes closed and just hope that they can keep delivering rock bottom prices to these discounters?” Hertzman asked.

Seconding McRaith’s sentiment, Riviere said he believes compliance is sustainable and mass-producible. He explained that while Levi’s may require factories to have waterless, waste-less machinery in keeping with the company’s compliance standards, his best-in-class vendors who meet those standards are consistently getting the business.

“I will not support the fact that it’s an incremental cost that does not have a return,” Riviere said.

The consumer, however, is key to the compliance conversation Goldblatt noted. “We have to have compliance because the industry won’t self regulate,” he said. “And when we get into the aspect of somebody who is looking for a cheap jean, the industry has to spend a lot more time educating consumers, just like we did with coffee and chocolate and diamonds, that you have to pay a little bit more if you want to have a conscience and go to sleep at night.”

There was an overall consensus among the panelists that any major change toward adopting a compliant mentality has to start with the retailer and trickle down to supply chain partners who have to become more efficient, and ultimately more compliant.

“I think there’s a massive headache going on in the world today within the supply base,” McRaith said. “I think the reality is, the people that do not get this and are not committed to it—it’s a little bit like not being in China in 2004, you’re simply going to get wiped out. I think those companies that get behind it and get committed to it will be here in five years and the ones that don’t, they’ll be gone.”